Calgary’s office market faces a slow recovery

Susan Thompson of Avison Young says a reduction in average space needs is forcing landlords to reposition their properties

Susan Thompson is research manager at the Avison Young office in Calgary.

Susan Thompson, research manager at the Avison Young office in Calgary.

Calgary’s Business: What’s the current vacancy rate in the downtown office market and how is it trending? What was its peak and what was the lowest its ever gotten?

Thompson: Calgary’s downtown office vacancy rate is currently sitting at 26 per cent and it has been fluctuating around that level by plus or minus half a percentage point for over a year now. The peak for this downturn was recorded in second quarter of 2017 at 26.4 per cent, and that is the highest vacancy we’ve seen in over 30 years, possibly even higher than vacancy reached in the early 1980s before records were reliably maintained. The lowest we’ve ever seen was in the second half of 2006, when downtown office vacancy reached the incredible low of 0.3 per cent.

CB: Absorption is the change in occupied space. Can you give me a sense of a few things? When was positive absorption at its highest level and how much? Also for negative absorption?

Thompson: In terms of positive quarterly absorption, the best downtown Calgary ever saw was fourth quarter 2007 with 1.4 million square feet. In terms of positive annual absorption, the best was 2011, which saw 2.4 million square feet, when Calgary was experiencing strong recovery and growth following the financial crisis. As for negative absorption, which is where Calgary’s office market has predominantly been for the last three years, the highest quarterly negative absorption was in third quarter 2016, negative 1.2 million square feet. The worst year for negative absorption was 2015, which saw negative 3.1 million square feet, directly following the dramatic decrease in the price of oil.

CB: What are the trends you’re seeing in the downtown office market in terms of leasing activity these days?

Thompson: The biggest trend we are noticing in downtown office leasing activity is that over the last year, deals under 5,000 square feet are making up the largest share of those being completed. This is a big change for Calgary, which traditionally was dominated by large, 100,000-square-foot and greater, tenants. This reduction in average tenant size is forcing landlords, who’ve enjoyed full and multi-floor tenancies in the past, to reposition their properties to cater to the active part of the market.

CB: Is there a forecast going forward of what the Calgary downtown office market is going to look like for vacancy for the rest of this year and beyond?

Thompson: Looking to the future, without a significant change to the economy and concrete resolutions to the bottlenecks the energy industry is facing, Calgary’s office market faces a slow recovery. Our current prediction is that absorption will be positive 100,000 square feet in each of Q3 and Q4 2018, and rising to 150,000 square feet per quarter in 2019 and beyond. These reasonable assumptions continue to indicate that Q2 2017 was the peak vacancy for this downturn at 26.4 per cent. With the addition of Telus Sky in a few quarters, vacancy is forecast to rise to 26.3 per cent, remaining below the peak value recorded in 2017.

CB: Is there any new office building still under construction and what’s the likelihood of seeing new building construction in the coming years?

Thompson: Downtown Calgary’s only remaining office building under construction is Telus Sky. While this is a mixed-use building, the office component will be 460,000 square feet, of which 39 per cent is currently pre-leased. Less than a year remains before this building is expected to open for occupancy. As a result of the current economic conditions, high levels of vacancy and weak demand for space, no new development is expected to be announced in Calgary’s downtown core for several years.